According to forecasts by Huobi Research, Bitcoin price will bottom out in 2023 and the crypto market will see significant breakthroughs in on-chain data storage and Layer 2 scaling solutions.
Researchers at crypto exchange Huobi looked at two major developments affecting the crypto market and industry this year to provide a fundamental prediction for 2023.
Crypto Prices Low in Q1 2023
Leverage in DeFi protocols has already decreased significantly and the Federal Reserve has probably already completed the most difficult period of monetary tightening. Therefore, after the panic triggered by this year’s FTX crash in the crypto market, the Huobi team predicts a bottom in the first quarter of 2023.
According to Gin Chao, former Chief Strategy Officer of Binance, data from previous cycles shows, bitcoin hits next all-time high an average of 18-24 months after hitting bottom. Depending on where the last cycle trough of 2022 is located (middle or end of 2022), the price of Bitcoin could even reach its next all-time high at the end of 2023. However, the current macroeconomic circumstances may prolong the current bear market, this is why the price of Bitcoin could not reach the next all-time high until 2024.
Crypto Investors Show Strong Interest in Layer 1 Projects
Despite the long bear market, Huobi report experts believe that the The total investment in the Web 3 industry will exceed $27 billion in 2022. Although this number has been declining in previous quarters, this year’s Web 3 investment trajectory indicates healthy institutional interest in the DeFi market. Moreover, the growing number of DeFi unique users also pleads for a healthy development of this crypto area.
Investments in this area totaled about $6 billion in the third quarter. Of this amount, approximately US$625 million was spent on the development of layer 1 (L1) applications of the Sui and Aptos blockchains.
Investors also increased their bets on infrastructure projects for L1 blockchains, zero-knowledge roll-ups, and middleware applications such as decentralized identity systems and oracles.
A Layer 1 blockchain provides the basic infrastructure and rule systems for processing and executing transactions in a blockchain ecosystem. The scalability of L1 chains can be improved using so-called roll-ups, specific chains of the second layer (L2). This is done through what are known as transaction batches (“stacks”) and the transfer of L2 to L1 data.
Many new L2 DeFi projects launched during the bear market, a trend that is expected to continue in 2023. The total value locked in decentralized applications (TVL) increased by 131% between January and October 2022. This is equivalent to 7.5% of Ethereum’s TVL.
DeFi protocols: what matters in 2023?
In 2023, protocols that guarantee a steady revenue stream, rather than relying on users to provide liquidity in exchange for rewards, are likely to be the biggest contributors to DeFi’s success.
Moreover, the DeFi market needs to create a broader supply of derivatives and financial products to avoid the concentration of power in a few protocols. Finally, protocols should take into account the regulations necessary to survive and thrive. For example, the European Crypto Asset Markets Act, which is due for ratification in 2023, already contains some provisions for the DeFi industry.
Additionally, according to Huobi, specialized blockchains designed exclusively to run decentralized applications are expected to become popular in 2023. These include, for example, Axie Infinity and DeFi Kingdoms.
These are already running on proprietary Layer 2 dApp blockchains. Several existing L1s, such as Polygon, Avalanche, and the BNB chain, can also form the basis of these L2s.
Additionally, interest in cryptocurrencies from wealthy Web2 moguls like Jack Dorsey and Twitter CEO Elon Musk will likely lead that social media dApps will receive more attention in 2023.
How will zero-knowledge rollups evolve in 2023?
Zero-knowledge (ZK) rollups are a class of rollups that provide a summary of changes required at the L1 level due to L2 transactions. In addition to the proposed changes, L2s submit proof of validity. This is the cryptographic assurance that the proposed L1 changes are in fact the result of executing transactions in an L2 batch.
According to Huobi, validity proofs are complex and ZK roll-ups may require special hardware to speed up proof generation. Until that happens, ZK roll-up development will increase in 2023, but not mass adoption reach.
ZK deployment projects to watch in 2023 include Starknet and zkSync 2.0, the latter being the fastest ZK-L2 software. Additionally, developers are working to reduce deployment costs by compressing transaction data sent to L1. These improvements are expected to begin in the second half of 2023 and continue through 2024.
Huobi: Storage demand will increase significantly in 2023
According to Huobi’s forecast, the demand for blockchain storage options will rise sharply in the coming year. The programmability of decentralized on-chain storage protocols such as Filecoin would play a major role in this regard. The project is currently working on a full update.
Filecoin has already launched a virtual machine for its protocol. It executes the smart contract code needed to run the basic logic of the Filecoin network.
The second phase of the upgrade, scheduled for 2023 and 2024, will allow users to deploy custom smart contracts on the FVM. At the same time, Filecoin bridges the compatibility gap between FVM and Ethereum Virtual Machine (EVM). The EVM, in turn, is the part of the Ethereum blockchain that runs the smart contract code.
Improved FVM compatibility with EVM will allow native Ethereum applications like MetaMask to work on the Filecoin network.
How will crypto regulation evolve?
Some of the regulation will likely target crypto projects that raise national security concerns (such as TornadoCash). Additionally, regulators will especially watch projects where the founders own a large portion of the assets. New laws in 2023 could also require on-chain protocols to perform know-your-customer checks and hold a protocol’s community accountable for legal action.
According to Chao, DeFi hacks can also simplify and speed up the regulation of crypto projects.
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